Fossil's Better-Than-Expected Results Push Shares Higher

Fossil's fourth-quarter earnings exceeded analyst expectations which sent shares higher. Let's check out why and if we should buy Fossil right now.

Feb 13, 2014 at 2:00PM

Fossil (NASDAQ:FOSL) has just released its fourth-quarter report for fiscal 2013 and the results far exceeded analyst expectations. Shares are rallying higher on the news and the strong results could support a continued run higher. Let's dig deep into the report and determine if we should buy Fossil right now or if we should wait for shares to cool down.

The watchmaking giant
Fossil designs and distributes high-quality consumer products and accessories worldwide, with the most popular of these being watches. Its company-owned brands include Fossil, Skagen, and Relic, but it also manufactures for world-renowned brands such as Michael Kors, (NYSE:KORS) Burberry, and Emporio Armani. Being the go-to source for watches makes Fossil a staple in the luxury goods industry.

Fosl Fool Flickr

The results
Fossil released fourth-quarter results for fiscal 2013 after the market closed on Feb. 11. The results exceeded analyst expectations and contained the following statistics: 

Metric Reported Expected
Earnings Per Share $2.68 $2.44
Revenue $1.06 billion $1.02 billion

Earnings per share increased 6.8% and revenue rose 12.1%, as sales grew in all of Fossil's regions: wholesale net sales grew 12.8% in North America, 17.6% in Europe, and 5.8% in the Asia-Pacific region. In addition, direct-to-consumer sales increased 8.7%, resulting in overall sales growth of 12.1%. The driving force behind all of this growth was the immense strength shown by Fossil's watch segment; here's a breakdown of sales and performance by segment for Fossil with a year-over-year comparison:

Segment Revenue Growth
Watches $833.8 million 14.3%
Leathers $127.1 million (3.9%)
Jewelry $82.1 million 26.9%
Other $19.4 million (9.8%)

The company noted that watch sales in the Fossil brand showed "modest" growth, which offset most of the declines in the Skagen brand. However, 14.3% overall growth is far from modest, so this was Fossil's way of saying that the majority of growth came from the multi-brand portfolio it manufactures for; I think it is clear that Michael Kors provided the lion's share of the growth, as its recent earnings were explosive and it noted continued demand for its watches as a key driver. 

Screen Shot

Michael Kors showed earnings increasing 73.4% and revenue increasing 59%, absolutely blowing away analyst expectations. Revenue topped $1 billion for the first time in the company's history, which means Fossil's earnings from Michael Kors hit an all-time high as well. Best of all, Michael Kors' outlook for the upcoming quarter points toward growth of over 25% in both earnings and revenue, setting Fossil up for further success; it's as if a new saying can be introduced to the market: "as Michael Kors goes, so goes Fossil."

The year ahead
In the report, Fossil also gave its first quarter and full-year expectations for fiscal 2014. Here's what the company expects to see:

First quarter '14

  • Earnings per share of $1.10-$1.18 from $1.21 a year ago; the $1.21 included an $0.11 benefit related to acquisitions
  • Revenues increasing 12.5%-14%
  • Operating margin in the range of 12.25%-13% from 13.9% a year ago
Full-year '14
  • Earnings per share of $6.90-$7.30 from $6.56 in fiscal 2013
  • Revenue increasing 8%-10%
  • Operating margin in the range of 16.5%-17%
Although the company's earnings are not expected to be all that great in the first quarter, it still looks like 2014 will end up being a good year for Fossil. As a kicker, its full-year outlook is right in-line with the consensus analyst estimate which calls for earnings per share of $7.23 on revenue of $3.5 billion. A strong set of earnings results paired with in-line guidance is exactly what investors hoped for and Fossil delivered. 
 

The Foolish bottom line
Fossil has proven once again that analysts cannot keep up with its growth as it exceeded expectations in its fourth-quarter report. Its skills in watchmaking can single-handedly drive earnings and revenues higher, regardless of the performance in its own brands. I believe brands such as Michael Kors will continue propelling Fossil's earnings higher, causing substantial price appreciation in the stock. Investors seeking exposure to this industry should look to pick up positions immediately, as it appears the stock will be heading back toward its 52-week high.

While Fossil and Michael Kors would be good additions to your portfolio, there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Joseph Solitro owns shares of Michael Kors Holdings. The Motley Fool recommends Fossil and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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